Transformation of the construction sector in full swing

Since 2006, our company CEEC Research carries out regular research of the
construction sector in the Visegrad Four countries. Over this six-year period,
we have had the opportunity to monitor the development not only of construction
sector itself, but also changes in behaviour and management of individual
companies. Especially the last three years were very turbulent in this respect,
and without exaggeration we can call them the beginning of transformation of the
Czech construction industry.

Previous nearly ten years of constant growth had a significant influence on
the behaviour of construction companies. In the last years of growth (2006
– 2007) there was a significant overheating of the sector. As our interviews
with construction companies showed, only 12% of companies suffered from lack of
orders. On the contrary, one of the most frequently reported problems limiting
company growth was the shortage of experienced workforce able to handle the
large volume of new orders.

Decline following overheating

Construction sector has undergone a big change since then. We noticed the
first drop in the expectations of construction companies at the beginning of
2009 (prediction of a 3% decrease). In the middle of that year, when the crisis
was already on the way and a significant decrease in the volume of new orders
was obvious, there were even signs of certain panic – in 2009 companies
expected the market to decline by 11%! Fortunately, this did not happen,
however, it shows the initial shock of the fall in new orders for which the
market was not ready. Over time, the industry acclimatized to the new market
conditions and companies’ prediction in the 2010 deviated only slightly from
the final figures by the Czech Statistical Office (compare
industry´s expectations from July 2010 – annual market decline by 6%
– vs. final CSO figures published half a year later : 7.8%).

No lack of people any more

Most companies currently see lack of skilled workforce as a negligible
problem. “We can assume that operation of construction companies is and will
be very individual. It will depend on the ability of market actors to replace
any business interruptions by other activities. In any case, reduction of
workers in construction has already occurred and the process will still
continue,” says František Vaculík, CEO and Chairman of PSJ.

On the contrary, problems of insufficient demand, are now mentioned as the
most common limiting factor for the growth of construction companies (98% of
respondents in our survey confirm existence of these problems, i.e. about
8 times more than in 2007). Construction companies now suffer from lack of
private demand, and demand of publicly funded sector, which is mainly due to
budget restrictions. This is confirmed by the CEO of Swietelsky stavební and
chairman of the Road Contractors Association (RCA), Petr Čížek: “Our
current major constraint is the road construction sector being non-conceptual.
In accordance with the past state concepts, we equipped ourselves with the
necessary resources to handle the state-funded projects and these resources are
now largely under-exploited. However, our economic results are particularly
affected by the increasing competition, which is related to commissioning the
projects to utterly incompetent firms that are ´able to make´ the price.”
Zdeněk Osner, CEO of Energie – stavební a báňská also mentions the
decline in the volume of new commissions in the market: “Our main problem is
totally inadequate supply of construction contracts and opportunities for the
upcoming season.” Today 41% of construction companies say they have fewer
contracts than a year ago.

Importance of personal contacts decreases

The crisis and smaller volume of new contracts have influenced the ways and
paths that construction companies use for getting new contracts. For the first
time since the beginning of our research, leaders of construction companies
consider tenders or selection procedure the most effective way to obtain
construction contracts. On the contrary, the previously acclaimed ways
(long-term co-operation and personal contacts) have been apparently losing their
importance since last year. Directors of construction companies consider direct
customer demand the least efficient way of obtaining contracts. Direct demand
has significantly decreased as a result of the crisis, and the time when
companies could refuse contracts due to work overload and too high demand, are
already long gone.

Poor preparation of projects

The current outlook for next year, in the words of the management of
construction companies, does not inspire greater hope. Rather the opposite
– directors expect continuation of the downward trend. Low number of new
projects in progress is considered as one of the crucial problems. “I see the
biggest future problem in halting preparation of construction projects. So even
if there was a change in investment strategies of public budgets, the projects
are not ready, so you cannot build,” says Pavel Pilát, CEO of Metrostav. This
is confirmed by managers of project and engineering companies with whom we did a
separate research in June and July. This research showed that the decline in
preparation of new projects will continue this and next year too. “The volume
of new government tenders related to preparation of transport infrastructure
construction has been lower by tens of per cent in the past two years,” said
Václav Hořejší, CEO of Arcadis CZ.

Crisis also has a positive impal

Given the negative outlook on the volume of new contracts, increasing the
efficiency remains key priority for construction companies for the next
12 months (97% companies confirm this). However, many directors of construction
companies admit that the current crisis has at least some positive effect
– the current environment allows companies to implement steps they had not
enough capacity to implement at the time of rapid growth. At corporate level
there is a transformation of the Czech construction industry going on. This is
confirmed by directors of construction companies themselves. “We are more
efficient and productive. We deal with internal processes in the company, which
we analyze and look for real improvement opportunities. If we keep this approach
we will overcome this crisis, and the future crisis yet to come,” says Marcel
Soural, chairman of Trigema. “Yes, the crisis has changed our company. It has
helped to ‘solve neglected problems’, strengthened ‘revolutionary
vigilance and alertness’ of our staff and increase their toughness. Apart from
financial loses – our profits will fall to one fifth or tenth compared to
2010 – the crisis has a very positive impact on our company,” Ondřej
Chládek from the company Chládek & Tintěra Pardubice assesses the current
situation.

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